Private Manufacturing Company acquired 90 percent of Secret Corporation’s outstanding common stock on December 31, 20X5, for $1,152,000. At that date, the fair value of the noncontrolling interest was $128,000, and Secret reported common stock outstanding of $500,000, premium on common stock of $280,000, and retained earnings of $420,000. The book values and fair values of Secret’s assets and liabilities were equal except for land, which was worth $30,000 more than its book value.

On April 1, 20X6, Private issued at par $200,000 of 10 percent bonds directly to Secret; interest on the bonds is payable March 31 and September 30. On January 1, 20X7, Private purchased all of Secret’s outstanding 10-year 12 percent bonds from an unrelated institutional investor at 98. The bonds originally had been issued on January 1, 20X1, for 101. Interest on the bonds is payable December 31 and June 30.

Since the date it was acquired by Private Manufacturing, Secret has sold inventory to Private on a regular basis. The amount of such intercompany sales totaled $64,000 in 20X6 and $78,000 in 20X7, including a 30 percent gross profit. All inventory transferred in 20X6 had been resold by December 31, 20X6, except inventory for which Private had paid $15,000 and did not resell until January 20X7. All inventory transferred in 20X7 had been resold at December 31, 20X7, except merchandise for which Private had paid $18,000.

At December 31, 20X7, trial balances for Private and Secret appeared as follows: As of December 31, 20X7, Secret had declared but not yet paid its fourth-quarter dividend of $10,000. Both Private and Secret use the effective interest method for the amortization of bond discount and premium. On December 31, 20X7, Private’s management reviewed the amount attributed to goodwill as a result of its purchase of Secret common stock and concluded that an impairment loss in the amount of $25,000 had occurred during 20X7 and should be shared proportionately between the controlling and noncontrolling interests. Private uses the fully adjusted equity method to account for its investment in Secret.

Required

a. Compute the amount of the goodwill as of January 1, 20X7.

b. Compute the balance of Private’s Investment in Secret Corp. Stock account as of January 1, 20X7.

c. Compute the gain or loss on the constructive retirement of Secret’s bonds that should appear in the 20X7 consolidated income statement.

d. Compute the income that should be assigned to the noncontrolling interest in the 20X7 consolidated income statement.

e. Compute the total noncontrolling interest as of December 31, 20X6.

f. Present all consolidation entries that would appear in a three-part consolidation worksheet as of December 31, 20X7.

g. Prepare and complete a three-part worksheet for the preparation of consolidated financial statements for 20X7.

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Item Cash Current Receivables Inventory Investment in Secret Corp. Stock Investment in Secret Corp. Bonds Investment in Private Mfg. Bonds Land Buildings & Equipment Cost of Goods Sold Depreciation & Amortization Other Expenses Dividends Declared Accumulated Depreciation Current Payables Bonds Payable Premium on Bonds Payable Common Stock Premium on Common Stock Retained Earnings, January 1 Sales Other Income Income from Secret Corporation. Total Private Manufacturing Debit $ 39,500 112,500 301,000 1,240,631 984,121 1,231,000 2,750,000 2,009,000 195,000 643,000 50,000 $9,555,752 Credit $1,210,000 98,000 200,000 1,000,000 700,000 3,027,695 3,101,000 134,121 84,936 $9,555.752 Secret Corporation Debit $ 29,000 85,100 348,900 200,000 513,000 1,835,000 430,000 85,000 205,874 40,000 $3,771,874 Credit $ 619,000 79,000 1,000,000 4,268 500,000 280,000 468,606 790,000 31,000 $3,771,874